Chapter 7 Vs. Chapter 11 for Individuals
Filing bankruptcy can be an overwhelming, emotional process. Deciding whether to file Chapter 7 or Chapter 11 bankruptcy can be a difficult one. Understanding both types of bankruptcy will help you make the right decision for you and your situation.
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Identification
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Chapter 7 bankruptcy is also known as liquidation. Under this plan, you can discharge all credit card debt and other unsecured debt. Any unprotected assets will be sold to pay off your creditors. Chapter 11 bankruptcy is the kind of bankruptcy used by corporations to reorganize and continue operations. An individual filing Chapter 11 can seek an adjustment of debts by extending the time for repayment or reducing the debt. You can also seek a reorganization of your debts under Chapter 11.
Monthly Income and Expenses
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Consider your income in deciding whether to file Chapter 7 or Chapter 11 bankruptcy. An individual with a high net worth or who is engaged in business would be more likely to file under Chapter 11. If your average monthly income is less than your state's median income or you qualify under the "means test," you may file under Chapter 7. The means test will determine whether you have enough disposable income to repay at least a portion of your unsecured debts. Most individuals who file Chapter 11 are professionals with an above-average income who are experiencing a downturn in their income and need some breathing room to reorganize or repay their debts.
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Evaluate Assets
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Under both Chapter 7 and Chapter 11 bankruptcies, you are required to disclose all your assets. Individuals with very little assets or exempt assets should generally file under Chapter 7. Exempt assets include clothing, household goods, pensions, and your car up to certain amount. You may also keep your house depending on the amount of equity in it. A person filing Chapter 11 usually has real property worth more than $1 million.
Role of the Trustee
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A trustee is appointed by the court in both Chapter 7 and Chapter 11 bankruptcy cases. The trustee will help guide you through the bankruptcy process and work with your creditors making sure they are paid or notified of a repayment plan. A trustee in a Chapter 7 case will secure your assets, if any, then sell the assets and repay the creditors. In a Chapter 11 case, the trustee will work with you to develop a payment plan for all outstanding loans.
How Creditors are Paid
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Once your assets are liquidated in a Chapter 7 bankruptcy, the trustee will use them to pay your secured debt first, such as an auto loan. Any money left over will go to unsecured creditors. The rest of your debts will be discharged and you will start with a clean financial slate. Most debts are discharged within a few months. In a Chapter 11 bankruptcy, your creditors will be repaid over a period of generally three to five years. During this time, your assets are protected and you are given some breathing room to help you pay back your debts.
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